Is it possible to live off dividends? How much money do you need?

Living off dividends is a financial strategy that has been working for years, and no matter how much time passes, it remains of great interest, especially for those seeking passive income. However, it should not be thought of as a fast and easy path.

Before investing in dividends, no matter how attractive it may sound, we must have some concepts clear. What dividends are and how they work, among other things. That’s why we’ve prepared this complete guide on dividends for you.

What are dividends and how do they work?

Dividends are the portion of profits that a company distributes to its shareholders. These distributions are usually made in cash, although they can also be in shares. In fact, it's important to point out that companies that generate stable profits distribute dividends regularly and periodically, without jeopardizing the business.

With this approach, it highlights the fact that this strategy is a constant source of income for those seeking financial stability.

What types of dividends are there?

• Interim dividend - This is the portion of the dividend paid to shareholders as an advance on the profits earned.
• Complementary dividend - This is added to the dividend already paid as an advance.
• Fixed dividend - This is a fixed amount set by the company, regardless of the profits earned.
• Extraordinary dividend - This is an exceptional dividend payment, distributed if the company has earned extraordinary profits during the period.
• Stock dividend - This is the one distributed in the form of additional company shares, not in cash.

The goal of following a dividend-based strategy is to create a steady flow of income that allows covering daily expenses without the need to sell shares.

The strategy of living off dividends

The idea of living exclusively off dividends is feasible, although it’s important to note that it’s only possible under certain conditions. First, a solid strategy is required, choosing companies with a consistent history of dividend payments. Additionally, it’s important to diversify investments.

Why is this important? By diversifying across different sectors, risks are mitigated. However, let’s define these aspects a little further.

When are dividends paid?

It’s important to highlight that companies that pay dividends in cash do so on a semi-annual basis. However, there are some key dates that should not be overlooked:

• Declaration date - This is the date on which the dividend amount is announced.
• Record date - This indicates that all shareholders registered on this date are entitled to receive dividends.
• Ex-dividend date - This is the date from which the stock is traded without the right to receive the dividend for those holding it.
• Payment date - This is the day when the dividends are paid to the shareholders.

Factors to consider about dividends

• Dividend yield - The percentage of annual dividends paid by a company relative to the stock price.
• Sustainability - It’s important to consider if the company paying dividends can maintain the payments over the long term.
• Dividend growth - It’s crucial to choose companies that increase their dividends year after year.

How much money do you need to live off dividends?

The calculation of how much money you need to live off dividends depends largely on two factors: the average dividend yield and your personal financial needs.

Yes, it’s worth mentioning that this strategy sounds attractive, but it also comes with many risks. Companies can reduce or eliminate dividends in times of financial difficulties. Furthermore, economic recessions tend to affect companies and, consequently, dividend payments. Some of the main risks include:

• Dividend reduction - During unstable economic periods, some companies may be forced to reduce or suspend dividends.
• Market volatility - Even if you receive dividends, the value of your shares can decrease.
• Lack of diversification - Focusing your attention on a few companies can put your portfolio at risk.

Alternatives to dividends for generating passive income

While living off dividends is a solid strategy in many respects, it should not be the only source of passive income. In fact, it’s important to note that there are other alternatives that can be of interest to generate greater benefit:

• Crowdlending - These are investments in loans to companies or individuals.
• Index funds - These offer investment diversification at a low cost.
• Real estate - Rental income can also be a consistent source of passive income.

At Inversa, we offer alternative investment products, such as crowdlending, which may be of interest to complement your passive income. All through a secure and trustworthy platform with all the support you need.

In this article, we’ve prepared a complete guide so you can explore the possibility of living off dividends. And you should keep in mind that, with proper planning and care, as well as adequate diversification and a clear understanding of the risks, this strategy can be a viable option for many investors.